Suppose Home Depot issues 30-year bonds on which it pays a 5.0% (nominal) interest rate. Further, suppose that bothHome Depot and the purchasers of its bonds anticipate inflation will average 2.75% during the life of the loan. Nowsuppose the inflation rate after the loan is made (i.e. after the bond is purchased) is actually 4.75% per annum. It followsthat the actual real rate of interest isand, ceteris paribus,are (is) financially better off than anticipated as aresult of the difference between the anticipated and the actual rate of inflation.O a. 2.5%, BondholdersO b. 2.5%, Home DepotO c. 0.25%, BondholdersO d. 0.25%, Home DepotNext pagege

As we know Real rate = Nominal interest rate - Actual interest rate we can calculate the following…

Answered: Suppose Home Depot issues 30-year bonds…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose you lent money to a friend a few years ago at a nominal interest rate of 6%. At the time ot he loan, you expected the annual inflation rate to be 2%, but the actual annual inflation rate was 1.2%. When the loan originated, you expected to earn a real return of but due to unexpected disinflation, you earned an actual real return of A. 2%; 1.2% OB. 4.8%; 6% C. 6%; 4.8% D. 4%; 4.8%
Inflation has been a reality for the general economy of the U.S. in many years. Given this assumption, calculate the number of years it will take for the purchasing power of today’s dollars to equal onethird of their present value. Assume that inflation will average 2.5% per year.
14. If the nominal interest rate is 8% and the inflation rate is 3%, the real interest rate A) 11% B) 5% C) -5%. D) 8/3 = 2.67% E) cannot be determined from the information given %3!
Study the associated figure. Adjusted for inflation, during which years during the period shown did the lowest gasoline prices occur? A) Gas was cheapest in 1998 - 1999 because the graph shows that the actual price of a gallon of gas was at its lowest in that time period. B) Gas was cheapest in 1998 - 1999 because the graph shows that the price of a gallon of gas in 2016 dollars was at its lowest in that time period. C) Gas was cheapest in 1980 - 1982 because the graph shows that the price of a gallon of gas in 2016 dollars was at its lowest in that time period. D) Gas was cheapest in 1950 - 1952 because the graph shows that the price of a gallon of gas in 2016 dollars was at its lowest in that time period.
Suppose Rosa is a cinephile and buys only movie tickets. Rosa deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a movie ticket is priced at $10.00. Initially, the purchasing power of Rosa's $3,000 deposit is movie tickets. For each of the annual Inflation rates given in the following table, first determine the new price of a movie ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Rosa's deposit after one year in the first row of the table for each inflation rate. Finally, enter the value for the real interest rate at each of the given inflation rates. Hint: Round your answers in the first row down to the nearest movie ticket. For example, if you find that the deposit will cover 20.7 movie tickets, you would round the purchasing power down to 20 movie tickets under the assumption that Rosa will not buy…
2. According to an old myth, native Americans sold the island of Manhattan about 400 years ago for $24. If they had invested this amount at an interest rate of 10% per year and average inflation rate of 2.5%, how much would they have today in real values?
You may pay $15,000 for an annuity that pays $2500 per year for the next 10 years. You want a real rate of return of 5%, and you estimate inflation will average 6% per year. Should you buy the annuity?
The following table lists the per gallon prices of gas and milk for the months of April, May, and June. Assume that the typical consumer buys 60 gallons of gas and 4 gallons of milk each month, and that April is the base period. Month April May June Price of Gas (Dollars per gallon) 2.00 60.1% Refer to Table 25-3. What is the inflation rate for May? 67.2% -4.1% 10% 3.50 3.85 Price of Milk (Dollars per gallon) 3.50 3.52 3.58
You and your spouse just adopted twin girls, little Heather and Beth. You want to make sure they are taken care of for the next 22 years. (A)Based on the following information, how much life insurance needs to be purchased for the husband using the income approach, if any? (B) How much, if any, needs to be purchased for the wife using the income approach? Assume 3% inflation rate. Market Labor Value Household Production Value Husband $72,000 $15,000 Wife $15,000 $40,000
Suppose Dina is an avid reader and buys only comic books. Dina deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixed—that is, it won't change over time. At the time of her deposit, a comic book is priced at $10.00. Initially, the purchasing power of Dina's $3,000 deposit is comic books. For each of the annual inflation rates given in the following table, first determine the new price of a comic book, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Dina's deposit after one year in the first row of the table for each inflation rate. Finally, enter the value for the real interest rate at each of the given inflation rates. Hint: Round your answers in the first row down to the nearest comic book. For example, if you find that the deposit will cover 20.7 comic books, you would round the purchasing power down to 20 comic books under the assumption that Dina will not buy…
The CPI-U (U.S. city average, all items) has the following annual averages: a. For each year from 2014 to 2017 determine the annual inflation rate inpercent to two decimal places. b. Because inflation, like interest, is compounded from period to period (e.g., year to year), estimate the overall annual inflation rate per year from 2013 to 2017. Suggestion! Do not simply average the rates of part (a).
Assume that the economy has an annual inflation rate of 5 percent. Are the following investments profitable in real terms? You do not need to explain your answer. (a) A$1,000 face-value bond, which you purchase at a 30% discount, that pays a monthly coupon of$4. (b) A$1 million house the increases in price by$45,000 per year. You do not rent out the house, nor do you undertake renovations. (c) A$1 million house that you renovate for$45,000 over the course of a year, causing the price to increase to$1.1 million. (d) The spot price of silver is$31 per ounce. You purchase 50 ounces of silver for$1,600, in order to compensate the merchant. Over the year, the spot price of silver rises to$34per ounce, and you are able to sell the silver you have at the spot price. (e) You purchase a Non-Fungible Token (NFT) for$98 million. The following year, you are able to sell it for$102.5 million

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